Trump leaves loophole untouched; will it truly hit Russia hard?

The administration of President Donald Trump did not decide to extend the sanctions exemption, which allowed transactions with Russian banks related to the trade of Russian energy carriers. The decision to let the loophole expire was made on January 10 by Joe Biden's administration, and it simply took effect on March 12. Trump did not have to take any action, but as noted by the American station Fox News, it was a conscious choice by the White House.

The international community learned that the United States is adopting a stricter approach toward Russia. On the X platform, The Washington Post journalist Marc Thiessen stated that Trump had stopped Russian oil sales to the EU, preventing European countries from purchasing it. Former U.S. ambassador to Poland Daniel Fried clarified that the decision was made by Biden but stressed that it delivered a significant blow to Russia’s energy sector at a crucial moment.

Experts have significant doubts about whether closing the sanctions on Russian banks will truly be an effective tool for pressuring Vladimir Putin.

The fact that Trump allowed the exemption to expire can be used politically. However, it will not be a blow that could significantly harm Russia at this moment, tempers enthusiasm Dr. Szymon Kardaś from the European Council on Foreign Relations.

Meanwhile, Dawid Czopek, manager of Polaris FIZ and fuel market expert, reminds that "Russians have perfected the art of circumventing sanctions and settling transactions through third countries."

Joe Biden, in the final days of his term, decided to close the loophole in sanctions on the Russian banking and energy sector. It gave some Russian banks access to the American financial system for processing transactions related to oil and gas trade.

The loophole had been maintained to allow European countries—especially those dependent on Russian supplies—to settle with Russia in American currency. The second reason for maintaining it was the fear of a drastic increase in oil prices in the event of a complete cutoff of Russian financial institutions.

Although the annulment of licenses for Russian banks is seen as another pressure element on Moscow to engage in serious peace talks with Ukraine, it may not have that significant an impact.

- In Europe, Hungarian and Slovak companies buy Russian oil. Czechia prematurely terminated its contract, and deliveries were suspended. Today, a small part of Russia's oil exports go to Europe as contracted deliveries. The rest is primarily shipments to China and India (which do not settle in dollars - editor's note). Therefore, this action has symbolic significance, states Dr. Kardaś.

He emphasizes that timing is also crucial. - The decision was announced at the beginning of January with a maturity in March, so there was ample time to prepare. Besides, previously, countries cooperating with Russia renegotiated agreements, introducing mechanisms that protect both parties against such eventualities, adds the European Council on Foreign Relations analyst.

Let's remember that before Russia's invasion of Ukraine, the EU covered one-quarter of its oil demand and 40 percent of its gas demand with imports from Russia. However, this dramatically changed when the EU agreed to ban the import of both products in 2022. Only countries whose economies were strictly dependent on Russian supplies were exempted from the sanctions, and for now, liquefied natural gas (LNG) is not included.

Szymon Kardaś points out that the situation has also changed concerning the trade of Russian natural gas (at least the kind delivered via pipelines, as Europe still takes a considerable amount of LNG from Russia).

Regarding gas, we remember Putin's decree "gas for rubles" and the settlement mechanism proposed by Moscow. Even then, some countries agreed to payments in Russian currency. Besides, pipeline gas is purchased by only a few EU countries. The largest client is Hungary, and they also agreed to settlements in Russian currency in 2022. Even if someone still settles in dollars, it does not fundamentally impact the overall export of Russian raw materials, highlights Dr. Kardaś.

As the analyst recalls, Europe is no longer a key client for Russia; now, Asia is. - The largest gas markets for Russia currently are India and China. However, they predetermined conditions to minimize the risks of dollar settlements. These transactions are settled in national currencies: rupees, yuan, and rubles - he summarizes.

Moreover, as Reuters reports, Moscow effectively uses cryptocurrencies when selling oil to these countries to bypass sanctions successfully.

Dr. Kardaś notes that a genuine blow to Putin's raw materials interests would involve dealing with trade with these countries. However, the White House has yet to venture into this.

- If one wanted to seriously impact Russia's exports, they would have to target China and India. The question is whether the USA would be ready for this. A more effective solution would also include adding more ships from the shadow fleet to the sanctions list, eliminating loopholes in the insurance sector, or lowering the upper price limit for oil, for example, to $40. Even starting such a discussion would be a form of pressure, argues the analyst.

According to CBS, the tightened sanctions eliminating the loophole are significantly hindering Russia's ability to trade commodities in dollars. However, the result might be a $5 increase per barrel of oil.

Oil markets reacted indeed, but slightly. On Wednesday, there were moments when the price of Brent oil exceeded $71 per barrel, only to later drop to $69.50, then start rising again, currently costing $70.50. Similarly, the slightly cheaper West Texas Intermediate behaved, and its current price is $67.10.

- Typically, after every change in sanctions, the oil price reacts by rising, but after a few days or weeks, it returns to those levels, with a tendency to decline. Russians learned how to circumvent sanctions over three years of war, so further restrictions will likely have a short-term effect, comments Dawid Czopek. - At the end of January, Biden's strong sanctions brought about a significant change. Oil rose then but is below those levels again, he adds.

As the expert notes, the signals Donald Trump sends to Russia are ambiguous. - Recently, there have been reports suggesting the USA might cooperate with Gazprom regarding gas for Europe, consequently causing an 8 percent drop in the resource. The market increasingly attaches less importance to individual "events" of Trump and his associates. The US President has already said a lot and backed out of several things, our interlocutor evaluates.

According to Dawid Czopek, the key topic for oil prices will be a slowdown in the US economy and the real threat of recession, as well as a potential increase in production limits by OPEC.